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What You Need to Know About the Premium Tax Credit

What is the Premium Tax Credit?

The Premium Assistance Credit or Premium Tax Credit is a refundable credit that helps taxpayers pay for health insurance purchased through a government-sponsored exchange. In essence, this credit subsidizes the cost of health insurance throughout the year by allowing for a refundable credit at the end of the year. Taxpayers can also elect to have their total credit paid directly to their insurer in 12 equal payments over the year, effectively reducing their monthly payment by the portion of the credit received (this can get tricky and I will explain why shortly)

Who Qualifies for the Credit?

In order to be eligible for the credit, taxpayers must meet certain insurance, income and filing requirements:

  • Must obtain health insurance through a government-sponsored exchange
  • Household income must fall between 100% and 400% of the Federal Poverty Line
  • Taxpayer cannot be enrolled or offered an employer-sponsored health plan
  • Married couples must file a joint return

How is the Credit Amount Determined?

The credit is calculated based on a taxpayer’s household income in relation to the Federal Poverty Line. The Federal Poverty Line varies for families of different sizes, as shown in the link above. If your household income is less than 400% of the Poverty Line, you will be entitled to the credit. The calculation to determine the amount of the credit is a little tricky, but you should be aware of the credit and recognize whether or not your household income meets the credit requirements.

What Does this Mean for Me?

There are two ways in which taxpayers can receive the benefit of this credit.

  1. You can choose to calculate the credit at the end of the year, after all of your monthly health insurance premiums are paid. Under this method, you are responsible for the entirety of your health insurance premiums throughout the year. At the end of the year, the credit will be calculated on your tax return and will decrease your total tax liability for the year. If the credit produces a negative tax balance, that amount will be refunded to you after you submit your return.
  2. You can choose also to calculate the credit at the beginning of the year by estimating your income and having the estimated credit automatically sent to your insurer each month. Under this method, you are not responsible for the entirety of your health insurance premiums throughout the year. You are essentially receiving a subsidy each month, which lowers the premium. Here’s where things can get complicated. When you file your return at the end of the year, you will calculate the amount of credit you are due (based on your actual income) and compare it to the amount of credit you already received (based on your estimated income). If your calculated credit is GREATER than the credit you already received, fantastic, you will apply the difference to reduce your tax liability (or produce a refund). However, if your calculated credit is LESS than the credit you already received, you will OWE additional taxes.

When choosing between the two scenarios above, I will always recommend the first option. The second option relies on an estimate of income and can result in additional taxes at the end of the year.

As always, this is a brief overview of a complicated tax matter. It is aimed to raise awareness for those individuals who may not know they qualify for the credit or do not understand the options available. I recommend you ask a tax professional about your specific situation to ensure you are in compliance.


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